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“I refute it thus.” The FCA and “valueless” damages claims

Some Court decisions are so marvelous, so great at cutting through all the legal argument and theoretical absurdity, that they deserve to quoted at length. On February 4, 2016, the Hon. Raymond M. Kethledge, of the Sixth Circuit Court of Appeals, wrote just such an opinion. What follows is the first paragraph of that opinion, in it’s entirety:

Samuel Johnson would have had little patience for this case. Johnson once responded to the metaphysics of George Berkeley—a contemporary English philosopher who argued that matter has no existence—by kicking a large stone and declaring, “I refute it thus.”One can do rather the same thing with the government’s theory here. The defendant, Circle C, is a contractor that built several dozen warehouses at an Army base. In doing so, over the course of seven years, the contractor (actually a subcontractor) paid a handful of electricians about $9,900 less than the Davis–Bacon wages specified in its contract with the Army. As a remedy for that underpayment, the government sought and obtained a damages award of $763,000. The government’s theory in support of that award is that all of the electrical work, in all of these warehouses, is “tainted” by the $9,900 underpayment—and therefore worthless. The problem with that theory is that, in all of these warehouses, the government turns on the lights every day. We reject the government’s theory, reverse the damage award, and remand for entry of an award of $14,748.

The facts of the case were undisputed. Phasetec, one of Circle C Constructions sub-contractors on a warehouse construction contract, underpaid its employees in the amount of $9,916. This made Circle C’s compliance statements false, and created False Claims Act liability.

The government argued that every claim submitted that included work by Phasetec as “false” by the taint of that error, and therefore the proper measure of damages was every penny of the $259,298.18 paid to Phasetec. the government argued that all of Phasetec’s work was “valueless” because it was tainted by the underpayments. The Court rejected the argument, noting that the work was not “valueless” at all, and was, in fact, still working and still being used by the government.

The Court ruled that the proper measure of damages was $9916, which, when trebled, was $29,748. It then subtracted $15,000 paid by Phasetec in a separate settlement to come to a final damages measure of $14,748,

The lesson from this case is clear and simple. The proper measure of damages in a False Claims Act case is the government’s actual damages, defined as “the difference in value between what the government bargained for and what the government received.” US v. United Technologies Corp. Theoretical arguments that a good or service is “valueless,” even while the government is getting value from it, will fall on deaf ears in the Sixth Circuit.

Compare jurisdictions: Arbitration

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